November 5, 2009

A Steady Course

The stock market has fallen a bit in the last few weeks. This is due to a combination of factors, including disappointing macroeconomic news (housing, employment) and a few bad earnings reports.

I'm not worried that this is the start of a new move down in stock prices. I know that seems to be the prevailing view of many pundits, but there are reasons to be a little more optimistic.

First off, interest rates are very low. Investors need to generate return, and that isn't possible through CD's. There is still plenty of money on the sidelines, and I believe that investors will continue committing to risky assets, including stocks and bonds, because they have no other choice.

My long-held belief is that rates will stay low, which will likely put a floor on prices. But if I'm wrong and the Fed raises rates, it would signal increased confidence in the economic recovery. The U.S. dollar would appreciate, which would make our assets more attractive the foreign investors. This would likely cause stocks to rise, and since credit spreads are still wide, would not dramatically increase borrowing rates.

In other words, if I'm correct and interest rates remain low, stocks will probably not drop much more. If I'm wrong and interest rates rise, stocks will likely go along for the ride. As a result, the best course of action is to remain on course.

Ben Warwick is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.

See More of Ben Warwick's Portfolio Gourmet Blog Posts

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Tandem Performance Puzzle September 25, 2009 Typically, stocks and bonds go in opposite directions, a tendency that has exhibited itself throughout most of 2009. But in the last four weeks, long-dated Treasuries have risen right alongside equities, as the pair has each notched a 6% gain....
The State of the Consumer September 22, 2009 There's some obvious trepidation out there among buyers, who would rather save than spend. But instead of money-market accounts (and their zero yields), it seems that most folks prefer to stash their savings in the stock and bond markets.
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